Little let-up
01 April 2014
With many in the industry conceding that their last profitable quarter was nearly two years ago, new swathes of forthcoming legislation presents yet more worry for brokers and clients alike
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“If you don’t like the idea of regulation you might as well leave the room and, probably, leave the industry right now.” Such was the attitude that permeated many of the panels at Markit’s recent Securities Finance Forum, in London.
The opinion of the panel was unanimous when it came to what the biggest worry for the industry was. An association spokesperson put it bluntly by claiming that “what is keeping us up at night is without a doubt—regulation”.
The increased demand for transparency within the securities lending market is causing concern across the industry, with many in attendance conceding that a recalibration of market structure could become a distinct possibility.
The panel discussed the perceived threat of regulation, and explained that it appears in a variety of forms. The guidelines on ETFs and other UCITS issues highlighted as something that could restrict clients in their lending and collateral.
The Financial Transaction Tax was also raised as a risk that, if implemented as currently conceived: “Would have a dramatic impact on business, particularly when you look at the revenues of businesses today”, added another of the panellists.
However, the biggest single thing that is changing current securities lending behaviour, according to the panel, is the progressive and rolling influence of Basel III—which is intended to improve regulation, supervision and risk management within the banking sector.
This change in behaviour was said to be primarily felt by the borrowers, though the panel explained that the implementation of Basel III is set to run right down to desk level.
Another panellist, a company director, clarified: “Although the rules apply to banks, so they do not affect us directly, they are still affecting the way in which we transact our business—not just from a securities lending perspective, but from a repo financing perspective as well.”
This has led to a change in thinking regarding central counterparty clearinghouses (CCPs) which, it is hoped, will facilitate the efficiency and stability requirements within financial markets.
CCPs have traditionally been a no-go area for clients due to their low yield, but a balance of probability is beginning to emerge. In a world where capital is increasing in scarcity as well as cost, new structures such as CCPs could be what is necessary to change the shape of the market into something more transparent and secure.
Surveys taken at the conference revealed that the audience, made up of a cross-section of the industry, was split as to whether they expected an increase in CCP utilisation in the coming 18 months.
While the panel was not surprised at this result, they still expressed doubts. One panellist commented: “This industry is a very slow one to evolve, and 18 months is not a very long time. You only have to look at it from an automation and development perspective to realise that we are talking about years, not months—if at all.”
According to another speaker: “While there will be more choice for people, there will also be more regulation to wade through. We are yet to see some of the big waves coming through such as the European Commission’s rules on transparency which will change things again.”
The speaker continued: “I think the widespread use of CCPs is somewhat inevitable, but rather than becoming a significant part of the market, I expect it to be seen as another option for people. There are still only a limited number of markets Eurex that can be put through a CCP, though I believe Basel II and the Dodd-Frank reforms may instigate a push.”
So can these changes be shrugged off as a trickle down from the financial crisis of 2008, or is this proof that recalibration has already begun? The final speaker concluded: “Undeniably we are experiencing a recalibration. We have all altered our business model over the last several years in order to address what we feel best suits our institutions.”
“This gradual change is driven by regulation, and I expect this to intensify over the next 18 months. The need for bespoke solutions and customisable business models will become more and more prominent.”
“However, we should not forget that securities financing as a mechanism is still one of the most efficient ways of moving collateral around the system. It is tried and tested, as is the strong legal framework that supports it.”
The opinion of the panel was unanimous when it came to what the biggest worry for the industry was. An association spokesperson put it bluntly by claiming that “what is keeping us up at night is without a doubt—regulation”.
The increased demand for transparency within the securities lending market is causing concern across the industry, with many in attendance conceding that a recalibration of market structure could become a distinct possibility.
The panel discussed the perceived threat of regulation, and explained that it appears in a variety of forms. The guidelines on ETFs and other UCITS issues highlighted as something that could restrict clients in their lending and collateral.
The Financial Transaction Tax was also raised as a risk that, if implemented as currently conceived: “Would have a dramatic impact on business, particularly when you look at the revenues of businesses today”, added another of the panellists.
However, the biggest single thing that is changing current securities lending behaviour, according to the panel, is the progressive and rolling influence of Basel III—which is intended to improve regulation, supervision and risk management within the banking sector.
This change in behaviour was said to be primarily felt by the borrowers, though the panel explained that the implementation of Basel III is set to run right down to desk level.
Another panellist, a company director, clarified: “Although the rules apply to banks, so they do not affect us directly, they are still affecting the way in which we transact our business—not just from a securities lending perspective, but from a repo financing perspective as well.”
This has led to a change in thinking regarding central counterparty clearinghouses (CCPs) which, it is hoped, will facilitate the efficiency and stability requirements within financial markets.
CCPs have traditionally been a no-go area for clients due to their low yield, but a balance of probability is beginning to emerge. In a world where capital is increasing in scarcity as well as cost, new structures such as CCPs could be what is necessary to change the shape of the market into something more transparent and secure.
Surveys taken at the conference revealed that the audience, made up of a cross-section of the industry, was split as to whether they expected an increase in CCP utilisation in the coming 18 months.
While the panel was not surprised at this result, they still expressed doubts. One panellist commented: “This industry is a very slow one to evolve, and 18 months is not a very long time. You only have to look at it from an automation and development perspective to realise that we are talking about years, not months—if at all.”
According to another speaker: “While there will be more choice for people, there will also be more regulation to wade through. We are yet to see some of the big waves coming through such as the European Commission’s rules on transparency which will change things again.”
The speaker continued: “I think the widespread use of CCPs is somewhat inevitable, but rather than becoming a significant part of the market, I expect it to be seen as another option for people. There are still only a limited number of markets Eurex that can be put through a CCP, though I believe Basel II and the Dodd-Frank reforms may instigate a push.”
So can these changes be shrugged off as a trickle down from the financial crisis of 2008, or is this proof that recalibration has already begun? The final speaker concluded: “Undeniably we are experiencing a recalibration. We have all altered our business model over the last several years in order to address what we feel best suits our institutions.”
“This gradual change is driven by regulation, and I expect this to intensify over the next 18 months. The need for bespoke solutions and customisable business models will become more and more prominent.”
“However, we should not forget that securities financing as a mechanism is still one of the most efficient ways of moving collateral around the system. It is tried and tested, as is the strong legal framework that supports it.”
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